WHAT KILLED THE CO-OP BANK?

Posted by Patrick McFadden8pc on November 12, 2013

The news this week that the troubled Co-op bank is effectively to be taken over by two hedge funds marks the end of an era. Strictly speaking the bank was not itself a co-op but it was wholly owned by the Co-op Group and that meant most people regarded it as such.

The bank, which marketed itself as being driven by different values to many of our tarnished high street banks and was proud of not investing in certain areas and turning away business it did not feel matched its values, has been in trouble for months because of a capital shortfall of around £1.6bn.

The House of Commons Treasury Select Committee, on which I serve, has been taking evidence from the key players in recent weeks.

The main elements that make up the £1.6bn black hole are as follows: £289m from what the bank calls “core” activities; £682m from “non core” activities; £211 for customer redress (PPI claims); £47m for bank integration costs and a £298m write off for a failed IT transformation project and £73m for other costs.

A particular element in evidence to the Treasury Committee has been the proportion of the black hole made up of loans made by the Britannia Building society, which merged with the Co-op bank in 2009. The regulator and the former boss of the Co-op Bank agree that Britannia is responsible for over £500m of the total impairments – a very significant proportion of the total, but not the whole story.

The regulator warned the Co-op in late 2011 that it needed to raise more capital for the bank. The bank thought a big part of the answer was to proceed with the Project Verde takeover of 600 Lloyds branches – a deal which would have put the bank in a different league size wise and made it a real competitor to the big banks on the high street. In the end the bank was too weak to proceed with the takeover and the black hole grew to the point where the Co-op could not continue in its present form.

Witnesses from the Co-op, mostly now retired, have blamed different things for the banks troubles. Neville Richardson, the former Co-op bank boss, places the emphasis on over stretch – too much change at once involving the IT project, a project called Unity to integrate the bank more with the group and the Verde deal itself. Peter Marks, former Co-op Group boss rejects the overstretch argument and blames the Britannia loan legacy and the economic downturn.

Whoever is right – and the Treasury Committee will publish its own findings when the inquiry is complete – the best known name in mutualism in UK banking is not going to be owned and run as a co-op in the future.

There may be some silver lining for small bondholders – an important group – who may, ironically, get a better deal from the hedge fund shaped future than they would have done under the original plan which would have kept the Co-op group in control. But most people who are not bondholders will be asking what this means for mutualism in financial services.

The Co-op Bank will attempt to hold on to its values by having them, written into the mission statement of the restructured bank with a 75% majority needed to overturn the decision. The Co-op Group will point to their continuing minority shareholding of around 30% as a safeguard in this situation.

The problem is, the banking world is littered with fine sounding mission statements which are not reflected in the conduct of the institutions supposedly governed by them. Remember Bob Diamond’s comments about trust and good corporate citizenship? And this in a bank which has admitted trying fiddling Libor rates and has been fined be regulators in the US and the UK for a whole series of breaches. UBS, another Libor rigger says this in its mission statement “–When deciding on the appropriate course of action, we take into account not only compliance with laws, rules and regulations,but also whether a decision or activity is consistent with our values ofhonesty, fairness and respect.” If mission statements guaranteed good conduct in banking, the world would be a different place.

Understandably, customers will be sceptical about how the Co-op bank’s new structure can equate with their search for a bank that is different from the rest and that looks to more than the bottom line. Some will vote with their feet and move their money to another mutual. Others will stay, perhaps through inertia, and simply accept that they are banking with a bank run on no different lines to others.

This week I asked Peter Marks, the former CEO of Co-op group if he thought it was possible to have an ethical hedge fund. He gave a simple one word answer, “No”. His logic was that it is a hedge fund’s job to maximise profit at every turn. But that was not how the Co-op saw its role. Hard headed money men may say that is obvious given it developed a £1.6bn black hole. But it was not alone in doing that – the black holes in RBS and HBOS were much bigger.

I don’t bank with the Co-op but it is sad to see the demise of a different voice in banking, driven by different values to our usual high street banks. Perhaps the bigger question in all this is what it means for how the wider Co-op group is run. Peter Marks, in his evidence to the Select Committee described how having an elected board meant different constituencies guarded their interests in eg farming, retail, the funeral business and so on. His view was that this spread capital too thinly, meant important decisions were not taken and left the bank vulnerable. Yet other businesses manage diversity. Tesco has a bank as well as a retail chain. Marks and Spencer’s recently launched a banking arm. If these businesses can be diverse, can’t the Co-op do it too?

The bank is gone but can the Co-op learn from what has happened and combine the preservation of its values with clear headed decision making in the future? Are there changes needed in the governance structure which will make decision making easier and which can maintain the values of the group? This is the issue to which attention must now turn.